In this FinTech in Focus
Industry Headlines»
International Developments»
COVID-19 and FinTech
While banks and FinTechs have bolstered their digital efforts to keep up with the demand for contactless transactions, the use of cryptocurrencies, such as Bitcoin (BTC), has become an increasingly popular method of minimizing physical contact in payments. According to CoinIdol, 46 central banks and governments across the globe saw it necessary to create their own state-owned central bank digital currency (CBDC) during lockdowns due to COVID-19. Notably, China has tested a CBDC framework called the digital RMB in various provinces, including Shenzhen, Chengdu, and Shanghai. CoinIdol also reported that since the pandemic started, “the price of Bitcoin has gained by about 230% and Ethereum has also increased by about 227%.” It is likely that the upward trend in cryptocurrency valuations is due in part to people using more digital currencies to purchase goods and services online.
Industry Headlines
Data Privacy
During a virtual International Data Privacy Day panel late last month, CEO of Apple Tim Cook critiqued Facebook for its data practices and called for global data privacy reforms, according to CNET. These remarks follow reports that claim Facebook may file an antitrust lawsuit against Apple for its new App Store policies. During the panel, Cook said, “If a business is built on misleading users, on data exploitation, on choices that are no choices at all, then it does not deserve our praise. It deserves reform.” Cook also acknowledged Apple's new privacy policy, known as App Tracking Transparency, just one of a number of new transparency measures. According to PYMNTS, the App Tracking Transparency feature will disable ad tracking by default and will require application developers to seek users’ permission to use any ad tracking features. Apple plans to enforce compliance with this new policy by potentially removing non-compliant applications from their App Store. This policy is unsurprising as many federal and state entities have begun drafting data privacy legislation.
Buy Now Pay Later (BNPL)
Government engagement in “buy now, pay later” (BNPL) made headlines twice this week, with each headline reflecting a very different approach to this increasingly popular e-commerce trend. BNPL refers to applications or financial products that allow users to make purchases online and pay them off in installments ranging from weekly to monthly. These applications are often seamlessly integrated into retailers’ online checkout processes but usually come with high interest rates. According to Finextra, the UK’s Financial Conduct Authority (FCA) has announced new proposed regulations to curb the growing consumer debt burden amid growth in the BNPL industry. The FCA stated, “The emergence and expansion of unregulated BNPL products gives consumers a significant alternative to more expensive credit, but it comes with significant potential for consumer harm.” This proposed rule follows a study published by comparethemarket.com that discovered a fifth of British residents who used BNPL products to fund their Christmas shopping are now unable to meet their repayments without taking on more debt. In addition to this provision, the FCA will work with the Government and Bank of England to reform regulation of credit unions and with community development finance institutions (CDFI) to brainstorm alternatives to high-cost credit.
Contrastingly, the Royal Bank of Canada (RBC) announced last week that it plans to partner with Bread (Alliance Data) to create “PayPlan by RBC,” a pay-over-time option for high-value purchases at online retailers that adopt the BNPL framework. Vice President of Personal Lending at RBC Amit Sadhu said, “Our alliance with Bread ensures PayPlan by RBC seamlessly integrates into a consumer’s existing online checkout experience as a secure and convenient e-commerce payment option.” RBC is one of the first large banking institutions to launch a product following the BNPL framework but will likely not be the last. According to Finextra, “The BNPL industry has seen huge growth in recent years, with the likes of Klarna and Affirm becoming multi-billion dollar giants,” which appeals to banks looking for product expansion opportunities.
Investment Services
After over a week of market volatility and retail-trading, provoked mainly by the Wall Street Bets Reddit forum, Robinhood is under scrutiny for its decision to halt and/or limit trading on several equities. Some members of Congress, such as lawmakers Congresswoman Alexandria Ocasio-Cortez and Senator Ted Cruz, joined market participants in their concerns. The company defended itself by clarifying that the decision was necessary because clearing house-mandated deposit requirements for equities increased tenfold, according to Reuters. In a blog post Robinhood released late last month, the company stated, “The required amount we had to deposit with the clearinghouse was so large—with individual volatile securities accounting for hundreds of millions of dollars in deposit requirements—that we had to take steps to limit buying in those volatile securities to ensure we could comfortably meet our requirements.”
By restricting users from trading individual volatile securities, Robinhood was able to lower its deposit requirement to the Depository Trust & Clearing Corporation (DTCC) by $700 million, according to The Wall Street Journal. The Wall Street Journal also reported that Robinhood had to fundraise more than $3.4 billion cumulatively during and following the unexpected surge in trading volume as the clearinghouses demanded more cash to cover the transactions. Due to the temporary lag between investors’ new stock positions and their cash actually being exchanged, Robinhood has to maintain deposit accounts that help clearinghouses finalize trades. However, the DTCC has the discretion to require Robinhood to post more of their own cash to insure against losses in volatile conditions, which they did.
While limiting trading of individual securities was likely necessary for Robinhood to maintain their cash requirements, the company is now facing a class-action lawsuit. Late last month, a Robinhood user filed a lawsuit against the brokerage after the company barred traders from buying shares of GameStop, according to CNN Business. The lawsuit, filed in the Southern District of New York, states, “Robinhood’s actions were done purposely and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood’s customers.” The lawsuit also claims Robinhood’s decision deprived users of the potential gains they could have made by buying the stock at a lower price than what it eventually rose to. Ultimately, the volume of buyers made the GameStop stock price surge and forced short-sellers who were betting against the stock to buy shares in the company to cover their positions.
One silver lining in Robinhood’s legal defense is the protections the company is granted in its user agreement. According to Reuters, the user agreement on Robinhood’s website states that it “may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict my ability to trade securities.” Given that the lawsuits against the brokerage are mainly seeking compensation for punitive damages, it must be proven that losses occurred due to Robinhood’s decision. James Cox, a professor at Duke Law School, said, “It will be hard to prove users suffered as a result of Robinhood’s measures because GameStop and other stocks covered by the curbs fell sharply on Thursday after the restrictions were announced.”
Cryptocurrency
Many have equated Dogecoin, a digital coin founded initially as a joke, to the cryptocurrency equivalent of GameStop after it soared 800 percent following exposure on the SatoshiStreetBets Reddit board, according to CNBC. Dogecoin was created in 2013 after a popular “doge” meme went viral, but the digital coin was not traded in high volume until the Reddit board speculation. After the value of the coin soared 800 percent, its total market capitalization stood at $8.2 billion, making it the ninth-largest cryptocurrency, as reported by CNBC. Although unlike GameStop’s long bull run, Dogecoin rapidly crashed—losing over half its recent gains.
Early last week, Visa CEO Alfred Kelly announced the company is developing a card scheme in its payments network that will be integrated with a full range of cryptocurrency assets. Given that Visa has already struck card deals with over 35 organizations in the cryptomarkets, including BitPanda and BlockFi, this scheme of wallet relationships has likely been in development for a while. According to Finextra, Visa will work with wallets and exchanges to enable users to purchase traditional cryptocurrencies and fiat-backed digital currencies—including stablecoins—using their Visa credentials or to cash out their cryptocurrency to make purchases at merchants where Visa is accepted.
International Developments
China
After months of heavy scrutiny from Chinese regulators and a mandate to become a financial holding company in its entirety, Ant Group Co. is planning to restructure itself into a financial holding company overseen by China’s central bank, according to The Wall Street Journal. Initially, Ant Group envisioned one of its subsidiaries becoming a financial holding company but was on track to brand itself as an internet-technology company. Eswar Prasa, a former head of the International Monetary Fund’s China division, said, “Financial regulators were concerned that Ant’s regulatory arbitrage had allowed the company to provide a rosy picture of its overall financial position and hide the financial risks engendered by its aggressive expansion into new lines of business.” Becoming a regulated financial holding company in its entirety will allow skeptical Chinese financial regulators greater oversight of the institution's activities.
India
Earlier this month, the Indian government announced it is set to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill to ban private cryptocurrencies while preparing for the launch of a digital currency by the Reserve Bank of India, according to the Times of India. The purpose of the bill is to prohibit all private cryptocurrencies in the country, with some exceptions to promote the underlying technology.
Saudi Arabia
Saudi Arabia’s central bank, the Saudi Arabian Monetary Authority (SAMA), is launching an open banking framework to allow for more innovation in its banking sector, according to CNBC. The regulator announced early last month that “with the support of market participants, SAMA plans to go live with open banking during the first half of 2022.” Essentially, an open banking framework would allow third-party developers to access and utilize customer data (with proper permissions) from their banks and serve as a facilitator to FinTech platforms. This will likely allow for more innovation and expansion of their budding FinTech sector, especially with over 70 percent of Saudi Arabia’s population being under the age of 30, the target market for most FinTech platforms. Hisham Al Falih, CEO of Rydah and London-based FinTech start-up Lean Technologies, said that SAMA has been “slowly enabling more technologies and innovation to the market. However, these FinTechs can only go so far without being able to access customer data, so I’m really happy to see Saudi adopt open banking.” Ultimately, access to customer data is what enables payment platforms like Zelle and Square to operate in the US, so the adoption of an open-banking platform is likely to promote the growth of similar platforms in Saudi Arabia.
For more information on FinTech in Focus or the Milken Institute’s FinTech program, please contact Kate Goldman at [email protected].